Al Rajhi Bank: Looking to the future

In a conversation with Robin Amlôt, Consultant at CPI Financial, Steve Bertamini, CEO of Al Rajhi Bank, talks about the bank’s performance in 2017 and its plans in the economic development of the Kingdom of Saudi Arabia.

What are your views on the Al Rajhi Bank’s performance in the last 12 months?Well I think the last 12 months have been very good for Al Rajhi Bank. We’ve seen double digit net income growth for the first nine months of the year. Our asset growth has been in excess of three per cent, which compared to the market which is actually down 1.8 per cent. We’ve also been able to achieve quite a few critical initiatives which I’m happy to talk about a bit later in the interview.

Al Rajhi has had nine quarters of growth now; Islamic banks in the GCC have in general been more profitable than their conventional peers over the last couple of years. Is this a trend that is going to sustain?Yes, I think we’ve seen Islamic banks now outperform conventional banks globally for the better part of the last 10 years, and every indication seems to appear to be that will continue. One of the big advantages Islamic banks have is much slower cost of funds and by definition they take a lower risk profile which obviously worked quite well particularly during the turbulent period many of us had to face a few years.

So how is Al Rajhi shaping the Kingdom’s financial landscape, what’s your focus for 2018, and how does that fit in with the general economic thrust of the Kingdom’s agenda?We’re very aligned with the national transformation programme and the 2030 vision. When that first came out we spent quite a bit of time as a team analysing that and finding areas that we thought made the most sense to us. For example, housing plays very well for our focus as a retail bank, we thought SME financing would be a great opportunity for us to also participate. Of course, with the increase of females in the workforce, we thought that was also a great opportunity for our bank.

Moody’s says that Al Rajhi is ‘best positioned in the Kingdom’ thanks to the Islamic franchise and the low-cost deposit base. Having said that, do you have any concerns about the corporate sector?Well actually we’ve done quite well in the corporate sector, as you might be aware we’ve been underrepresented for many years. We grew our share from 2015 we were 6.1 per cent share, as of the third quarter of 2017 we are at 7.6 per cent, which is quite a significant increase over a relatively short period of time.

We’ve also seen quality of our book improve, so we now have market leading indicators in terms of non-performing loans and our level of reserves is substantially higher than the market. I think we built the book well.

Is this going to continue to the future? Where’s the competitive position for the bank?For us, obviously retail is the area that we excel in. As you know, we’ve got basically a fourth of everything: a fourth of the branches, a fourth of the ATMs, a fourth of the point of sales, and we are very much focused on automation. Having said that, as I mentioned, in SME, corporate and treasury, we believe we have been underperforming for some time. So we’ve been putting more focus on those businesses and we’ve seen good gains over the last 18 months and we expect that to continue.

Are those the key areas for growth potential or are there other areas as well?The number one growth potential for us is mortgage, if you think about the country wanting to increase the percentage of home ownership, we’re in the prime position to take advantage of that. Our share of mortgages has also grown quite substantially—we’re at 20.4 per cent I believe, at the end of 2015, and we’re now at 24 per cent.

Roughly 42 to 45 per cent of every mortgage written in the last 18 months we’ve been able to have occur at Al Rajhi bank. Strategically, growing this part of the business will position the bank for long-term success.

The IMF projected GDP growth in Saudi Arabia to be close to zero for 2017, and looking to the whole of 2018 they’re talking about a softening of credit demand, which is partly on the back of reduced Government spending. Is that going to impact your prospects for the year?You must look at what’s occurring in the economy, but we are really focused on continuing to grow our position and proving our products. For example, in 2017 we launched 10 new products. We’re heavily investing in our digital agenda, so we still think there are a lot of opportunities. Everyone expects the new expansionary budget announced last year to have a positive impact on the economy, so we remain relatively optimistic about 2018.

There is a framework being put together to allow more foreign investment in the Saudi market. How important is that?I think it is critical—if you think about the country’s ambitions to transform the economy, it needs both foreign technology as well as investment. I think you will see the Kingdom increasingly leverage that, and this is partly why there has been so much focus in making changes to foreign investment rules, to how quickly trades get done—the T+2-1 etc.

All the changes that are taking place to enable and to increase confidence for foreign investors to come into the market, and of course Aramco is expected to be a game changer, not only for Saudi Arabia, but for the Middle East.

The bank has deployed several new products and implemented new technology in the last 12 months. How are customers reacting to that? Has it helped in customer acquisition?Look there are two broad measures that we look at to really see and understand how our customers view us in the marketplace, the first one we use is something called Net Promoter Score which really is a measure of customer advocacy. And effectively we’ve seen our Net Promoter Scores—and this is externally benchmarked by a third party—go from number seven in the Kingdom to number two.

We’ve therefore seen a huge improvement over the last 18 months. The second area is market share. We monitor market share across a broad range of areas and we’ve seen our market share increase in virtually every category over the last 18 months as well.

There have been changes within the bank that the customer themselves will not necessarily see, such as the payment service hub in collaboration with Accenture. What does that mean for the bank and for the services that you can offer?Well, ultimately the more you can automate and modernise your infrastructure, the better your cost, the simpler your procedures, the lower a chance of anything going wrong and therefore service levels tend to go up, so we’ve been investing heavily in that area.

Another area for example, has been robotics. We believe we are one of the leaders in implementing robotics across the Middle East. We’ve got over 200 bots in the bank dealing with, I believe, something like 15,000 transactions per day, so we think this is another area that will allow us to not only automate but also improve service at the same time, and lower our cost.

Some of the changes that banks make are things that customers do not see but should make their journey easier, more efficient and quicker. What are the key challenges for the bank now and in the future, are they all going to be focused on delivering that service as seamlessly as possible, and if you are going to do that kind of automation what does that mean for levels of employment in the bank?Banks are increasingly not dissimilar to many other industries. I think as automation and technology becomes a bigger and bigger part of your business, that requires different skills and different mixes. For example, this year, despite our growth, our employment has remained relatively flat.

So, I think we will end up with the same or fewer jobs but with better paid people, and increasing automation and digital technology will make it much easier for customers to self-serve and get better levels of service.

The competition is not other banks, the competition is going to be the likes of Amazon and Apple, because companies like them are leading the digital charge as this comes down to what the future of banking is? What’s driving the operational change? And how are you as Al Rajhi Bank going to be able to keep ahead of that or keep on top of it?I think the companies that you mentioned as examples are exactly the right ones to look at because they are changing the customer experience. They do not have any legacy and they are able to redesign processes, so in many ways we must do that to ourselves and this is an area we’ve been spending quite a bit of time. For example, we now have an Innovation Centre—so we can see how customers interact with technology, what they like and what frustrations they have, because increasingly it’s the experience that really makes a difference.

People expect a bank to work like Amazon so therefore when that experience isn’t the same they find it very frustrating and I think in many ways it felt like the industry recognises that they need to move faster otherwise they’re going to be at a competitive disadvantage.

It’s about quality of customer service and the experience around everything you try to do.

What excites you about the coming 12 months? What are you looking forward to most?I think as we digitise our bank faster, it actually opens up resources and capacity to invest in the business, so we are constantly changing our business model. For example, the way that we used to have a branch and open a new branch two years ago is materially different to the way that we are opening branches today.

You still need some type of physical environment and many times simply because of regulatory preference restrictions that require an employer to physically sign a document or have a wet signature take place—even that will change over time. But you still need to have an environment that is technology friendly and this is where we are evolving and trying different models, so I think there is a lot of new exciting formats, products and experiences that we can create for customers, not only in the next 12 months but, quite frankly, for the next three to five years.

If we can look specifically the faith-based side of things, you are certainly one of, if not the largest Shari’ah-compliant bank in the world. In that lens, what are the bank’s top priorities going forward?For us we always want to make sure that we are constructing products in a compliant manner, and this is where we are very fortunate to have in many ways quite a conservative Shari’ah board. This is one of the differentiators that I think has really helped to inspire confidence in our customers and one of the reasons that we continue to do well.

For example, you might be surprised to learn that our share of current accounts today is the highest that it’s ever been in the bank. And as you know having a very strong current account deposit base, particularly when you are a Shari’ah-compliant bank, is a huge competitive advantage. So we always make sure we stay focused on that and we’ve been able to see that happen over the last extended period, but in particularly the past 18 months as well.

Talking about the growth in your corporate banking business, this is one of the major challenges facing Islamic banking and the Islamic finance sector in terms of developing that market segment and its products for the future. Obviously, you have the retail deposit base to be able to leverage, but what is the best way forward for the industry in terms of creating a vibrant corporate finance sector?Well, it comes back to product development. For example, about three months ago, we had a FX forwards for the first time—which may not sound like a big deal—but for us as a bank and for the industry, it was quite helpful.

You have many conventional banks that will create an Islamic product but many times that doesn’t quite appeal to everyone. So we work very hard to innovate at a faster pace than we have, and we think that over time, the gap between conventional and Islamic banking will continue to narrow, which is, I think one of the reasons why you continue to see Islamic banking continue to outperform conventional banking.

You’re a big bank in the biggest market in the GCC. Stepping back and looking at the region as a whole, what is your outlook for the finance markets and the GCC economy overall for the next year?We believe the GCC economy will do better this than it did in 2017, obviously given all the difficulties and the fact that even places like KSA were basically zero growth or even 0.1, we believe next year should be better than that.

I think the IMF is forecasting 1.1 per cent, and this is before the announcement of the expansionary budget. I think UAE will do better, Kuwait will do better, so you think about some of the biggest markets in the region the future seems to be a bit brighter than it was in 2017.